SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. What makes a good company, and what makes a good leader? We’re going to have a wide-ranging conversation on that topic today with one of my favorite podcast guests, Nancy Koehn. She’s a historian at Harvard Business School. Nancy, welcome back to the program.

NANCY KOEHN: Thank you, Sarah.

SARAH GREEN: So we seem to be in a bit of a strange moment here when it comes to companies being good. And by that I mean sort of ethical and moral, yes, but also as creators of a greater good through creating jobs, profits, and that kind of thing. I want to take a minute to set up this question. So just bear with me a little bit.

In magazines like HBR, there’s a lot of talk about big companies pursuing various responsible initiatives, whether it’s Walmart’s efforts in reducing waste, Pepsi’s efforts on water, GE’s efforts on health care in developing nations. And in fact, our entire November issue is about so-called “good” companies, companies that do well while doing good and are great to work for. But I feel like there’s this big disconnect, because no one ever seems happy to have a Walmart come to their town. There was all this outrage last year because it turned out GE managed to not pay federal taxes. And then, Pepsi gets hammered all the time for producing a product that’s bad for people.

So there seems to be this disconnect between how the public sees business and how business sees business. But I don’t know whether this is a gap that’s just especially obvious right now because of the economic climate that we’re in, or if this is something that has always been us. So what is your take on all of this mess?

NANCY KOEHN: I think, Sarah, the gap between how companies see themselves and what they’re up to in society, in the marketplace, and how consumers or households or other stakeholders see business has a long history to it. I think businesses work very, very hard, have historically worked very, very hard to achieve a whole series of objectives. And those that are led and governed by individuals and the culture that is very clean and decent have tried to do that in what is considered, what they consider, and what history has judged to be very reasonable and often very ethical ways.

But on the other side of the corporate– if you will– campus, journalists, consumers, households, employees, unions if we go back further, look at business and see entities which grow in power. There’s a long arc that goes back to the late 19th century in business as power and footprint and influence growing. And there’ve been some interruptions along the way.

But we’re now at a period where business is again ascendant for all the creative destruction in the technology markets and in other markets and in the financial markets. Business is ascendant as a social force. It has more resources. It has more in-depth knowledge on the street and big-picture knowledge. It has an extraordinary amount of energy and experience. It now dwarfs government in those kinds of ways in terms of what it can bring to bear on social problems, on ticking, pressing issues like the environment, on incredibly important issues like education.

So you marry those different things, the gap between what people think, the increasing power of business, and the pressing and urgent nature of problems– and opportunities, but particularly problems. And you have people all over the world in different shapes and sizes looking to business and saying, you are responsible. You may not think you’re responsible. You are responsible. And so you must act on things. And you must act not just on a social initiative, but on all aspects of how you produce what is your good or service and on all the different ways that you touch communities. And you now live– Mr. CEO or Ms. CEO– you now live in a huge, beautiful, absolutely transparent, glass house.

And so I think the biggest thing going on is that business as power has climbed, the problems have grown in importance, and other players’ ability to affect those problems are no longer as great as they were. That’s the most important thing, two lines diverging. I think that’s the most important in explaining the gap.

But there’s another thing, too, that’s very important. And again, it’s seen best through the arc of history. And that is that one kind of capitalism, one frame in which business operates, is actually giving way to another. So for the last 60 years, the ascendant model has been something that we’ve called, for reasons of brevity or shorthand, shareholder capitalism. The idea was very simple. Business exists to maximize shareholder profits, be it a public business or private business. And that’s the game we play on. That’s the field we work on.

Well, that’s not really the ascendant game anymore. That’s not really the predominant game. The game, or the frame, the kind of capitalism that is now emerging, is choose your language– conscious capitalism, stakeholder capitalism, creative capitalism. All kinds of people, from Bill Gates to Warren Buffett to John Mackey, the CEO of Whole Foods, have talked and written about this. So the frame has changed.

And I sense that we now have business trapped in the middle. Global activists, consumers, particularly young consumers, all over the world, government, communities that don’t want Walmart, they’re all on the stakeholder or conscious capitalism channel. But business, in many, many cases, it still has one foot in either world or two feet in the older world and not enough of their body and their operating metrics and perspective in the new world.

And so you can have a leader like Jeff Immelt at GE get caught in the crosshairs. One part of his business is actively trying to be a good social citizen. But my goodness, look at the tax return. It’s all fair game. And the real question is not, what are you delivering on EPS, as important as that is. The real question is, how are you delivering on a variety of objectives for business, because the how is now everything to all these other folks looking at different companies.

SARAH GREEN: I want to ask you a bit about the leader’s role in a climate like this. And I know one of your current projects is a book on Abraham Lincoln. He strikes me as someone who, first, led in a very turbulent time, but also one of the few leaders America has had that people on both sides of the aisle agree was a great leader. Are there any sort of lessons that you have picked up from him studying his example that might be useful for leaders today?

NANCY KOEHN: Oh, I think Lincoln has lots and lots of pearls or bread crumbs for us to pick up today. And your point about agreement on Lincoln is very important, especially if you think about the paralysis caused by discord in Washington today. I think that probably the most important lesson that Lincoln can offer someone like Jeff Immelt or John Mackey or Michael Dell or Howard Schultz at Starbucks is this– When so much is so turbulent, when these very fundamental aspects, almost like tectonic plates on a landscape on which we operate, are shifting, and some are breaking up and falling into the sea, you have to be able to frame the stakes.

So one of the things that Lincoln did that was so successful was, in all these moments of tremendous upheaval, of extraordinary costs in terms of lives lost or people injured or communities disrupted during the Civil War, was to keep on holding the objective of the war. We would save the Union, the last best hope of man on Earth. We are fighting this war to save the Union, not just for right now, but for a vast future, as well. Those are just two of Lincoln’s many speeches in which he would explain why the war was being fought, what the trade-offs were in terms of pursuing his vision of saving the Union, how the war itself was affecting the Union.

So if you think about the abolition of the slaves and the creation of what would become the 13th, 14th, and 15th amendments, those were born in the crucible of war. They didn’t start off in Lincoln’s head at the beginning of the war. So he would explain how the war was itself changing America. And he would do that while always acknowledging what the extraordinarily high costs were.

And if we think about, again, someone like Jeff Immelt caught in the crosshairs of two different visions of what business’s role and purpose is, Lincoln was caught in those same crosshairs. What should America be? What were we? What are we becoming? Lincoln was constantly looking back to the past and then saying, here is what we must preserve of where we’ve come from, and here is where we’re going with those preserved aspects of the great American experiment. And he did it relentlessly.

Lincoln never stopped communicating, because the more turbulent things are, the more discordant they are, the more important it is that a leader keep on talking, keep on writing, keep on communicating, honestly, till that individual is absolutely sick to his stomach or her stomach at what they’re saying. But that has to be done. So the first lesson from Lincoln is frame the stakes.

And the second, much shorter but no by no means simpler lesson, is hew to your mission. Articulate your mission, the purpose of your company, the Damascus that you and your organization are working toward, and keep on keeping on. And the mission statement, PS, needs to be a lot bigger and a lot bolder than something that you source out to brand consultants and your PR folks. So second lesson, a worthy, big, hefty mission is very important because other people are holding you to it.

SARAH GREEN: So one follow-up to that is, of course, now we agree that Lincoln was a great leader. At the time, a lot of people hated him. And one person hated him enough to kill him. So it goes by way of saying, perhaps, that this is not easy. And you may not make friends doing this, necessarily.

NANCY KOEHN: It’s incredibly difficult. It’s a very astute observation. It’s incredibly difficult. And the more serious you are about your mission, and therefore, the more trade-offs it will involve, the more difficult it will be. So I do a lot of work with individual executives. I am a serious horseback rider. And I pay for that expensive habit by executive coaching. And we always start with the individual person, with why they want to do what they want to do.

And then, a lot of the work that I am doing now, both in small groups in the classroom and with individuals, is how do you help an individual leader access his or her core– if you will– courage muscles? What’s motivating them? How are they getting right with themselves about the mission they’ve set forth? And then, how do you create, from within, the energy, the commitment, the simple endurance and persistence to keep on doing this in the face of, like Lincoln, enormous disagreement and often enormous vitriol and criticism and even hatred? And that is absolutely essential.

And the interesting thing is– and this is very clear when you get to know Lincoln as I have– the interesting thing is that when a leader can find that and keep on summoning it up– because it’s not a single race; it’s a long, long journey– he or she finds great levels of satisfaction, deep, abiding satisfaction. Lincoln, in the end, was very satisfied with what he had done. He didn’t live to see the fruits of it. But he knew, once the war was over, what he’d accomplished.

And this is true around the world with leaders today. There’s a great sense of satisfaction and engagement that then, PS, becomes clear to the people around you and that feeds on itself. So yeah, it’s really hard. It’s really important. And there’s a lot in it in terms of individual satisfaction, engagement, and a sense of having done something very significant for the individual leader.

SARAH GREEN: So your most recent book is The Story of American Business. When you look back over that story, especially the last 100 years or so, what are the elements or the attributes of corporations that you’d like to see make a comeback? What does the history of business offer that can help us shape the future of business?

NANCY KOEHN: A couple of things. First, the culture of an organization is much more important than we, I think, tend to teach and talk about at the Harvard Business School. And if you think about companies like IBM, which has reinvented itself four or five times over the last century, or you think about companies like Coca-Cola or the United Parcel Service– these are companies that go way, way back in terms of their roots– the culture of those organizations– a company like Hewlett-Packard 20 years ago– these are organizations with a culture.

And that’s not just the values. And it’s not just things like how do we take care of our employees, as important as that is. It’s about an unspoken kind of compact between the leaders of the company, the customers in the company, the employees in the company. And it’s understood to be a compact that endures beyond a particular moment. So that compact is critical.

And I think that one of the things that really was so very important about building some of the companies that are now well over 100 years old was culture. So I think we need to rehabilitate the vitality and the critical role of culture, even in a time of mass layoffs, even in a time of a volatile stock market. And that again will rest squarely on the leader’s shoulders or the executive leadership team’s shoulders. That’s the first thing.

Second thing that’s really important is that for the first 50 years of industrialization in America, there was an enormous amount of optimism, but I think credible, healthy optimism, and really good slugs of idealism that characterized a lot of entrepreneurs’ that turned into organizational managers’ and leaders’ outlook. And I think one of the things that’s very important today is that we need to dig deep and look at what are the sources of credible optimism in this country today, not just within America, because most of the large companies are global. But they’re really important, reasonable, and enduring.

And this is the third really important lesson, maybe the most important– and that means that leaders in all ranks within an organization are going to have to figure out a way to manage fear. So there’s an enormous amount of inchoate, indirect, obvious fear. That’s why there’s trillions and trillions of dollars sitting in corporate coffers right now, because people are too scared to hire and spend. And there’s fear everywhere. There’s fears in cubicles, there’s fear in meeting rooms, there’s fear in the way we’re handling our handheld devices, our smartphones.

Fear is everywhere. And most of that fear is not healthy. Most of that fear is not helping us make a better mousetrap. Most of that fear is not steering American business toward a better future and helping it be socially responsible and effective and satisfyingly good in the broader community. Most of that fear is destructive. And it’s in everyone’s hearts and everyone’s heads. And it is the leader’s job.

The most important that leaders do is actually not make allocation decisions, as important as that is. The most important thing leaders do is hold the energy and channel it and effect it and turn it on a dime, and help it motivate and engage a widely disparate group of people called an organization or a company. So we’re going to have to figure out how to dial down fear– acknowledge it, dial it down, and manage it in order for that optimism and that culture to flourish, in order to really start thinking about, how does this organization step up on the higher road and start walking?

Because it’s not just about market performance now. It’s about a whole bunch of things, including keeping the American experiment– Lincoln’s last best hope of man on Earth– vital, improving, and moving forward into the 21st century in a much more turbulent moment. So those three lessons, they’re all related. They’re all important.

SARAH GREEN: Just to switch tracks a little bit here to one of your other ongoing projects and social entrepreneurship– I know that’s another area where, within HBR and the halls of Harvard, we’re very excited about some of the innovations that social entrepreneurs are bringing to the table– doing well by doing good, definitely, but on a small scale. Do you think that there is a scalable approach to that kind of problem solving? If you’re a big, multinational firm, can you learn from social entrepreneurs? Or are they just kind of a cool charity replacement, maybe, but not something that’s ever going to scale up to a really high level?

NANCY KOEHN: Oh, I think there’s a lot to be learned from social entrepreneurs. And I think, if you look at the history of significant leaders that really made a worthy difference in the world– and that, of course, includes building a successful company that competed in a commercial market, but it’s much more than that– if you look at that history, it’s replete with people who had this insatiable curiosity– and not just curiosity about other companies in their business, and not just curiosity about their value chain– curiosity about the world around them and how they could keep learning from other people, including large or small, in their industry or out.

I think of someone like Howard Schultz, who is just such a fascinating entrepreneur and who’s really decided to pick up this gauntlet right now. So here’s the man who really creates Starbucks. He doesn’t found it, but he creates what we know of as Starbucks. He creates a company that, all the way along, has a big social set of commitments. And he does it for his own reasons. He didn’t want, he said, to create a company that would have fired his father.

So from the beginning, private and then public, everyone that works 20 hours gets benefits. From the beginning, we’re going to be a socially responsible citizen in the communities where we farm our coffee. From the beginning, we’re going to educate our people well and offer them stock benefits. From the beginning, we are going to be a company that is proud of our social footprint. And we’re going to do that as a public company. And that’s a very interesting, complicated thing to do. And he does it without flinching, without hesitation.

And then, you fast-forward through Starbucks ups and downs. And now, you get to 2011 and Howard deciding that he’s got to put his hat into the jobs creation ring. So Howard makes this pledge late this summer that he’s going to solicit leaders all around the country and all around the world, but particularly in America right now, to make a commitment hiring, to make a commitment to trying, through a variety of means, to break the political deadlock in Washington, which is now, right now at this moment in history, the single biggest issue for business in America, and by virtue of ripple effects, around the world. It’s not what’s happening to commodity prices. It’s not what’s the price of oil. It’s not even the incredible turbulence of the stock market or the education levels of workers. It’s right now what in the heck is happening in government? And PS, what does that mean for how we’re going to operate six months from now or 18 months from now?

So Schultz decided it was good business and it was something that he needed to do as a person of influence. And so he, I think, is, in a single-handed way but with increasing support from other business leaders, charting the future of what we will call business leadership. And PS, it’s a future that’s as much about what’s happening in government and what’s happening to our workforce and what’s happening to our communities as it is about what’s my stock price today.

SARAH GREEN: I’d like to ask you a little bit more about the balance between government and business. Because earlier you mentioned that business has been ascendant, that they’ve even surpassed what government can do in terms of improving people’s lives. Is that because government has also been sort of digging itself into a hole and becoming less and less effective? What’s the proper balance between the two?

NANCY KOEHN: Well, it’s changing. It’s changing rapidly. And if we back the tape up before the financial crisis, I’ll bet– and we could assemble 100 business leaders from public and private companies– I’ll bet to a one, none of them was spending as much time thinking about what was happening or not happening in Washington as we are today.

So in the same way that technology has converged and is converging– think about your iPad or your iPhone– the old boundaries between business and government and society are all crumbling. And a new kind of convergence is happening where what happens in Washington or doesn’t happen is critical, short-term, medium-term, long-term, to what a company can do or not do in service to its mission, and vice versa. What business is now doing is incredibly important in terms of employment, the stock market, retirement accounts, to what Washington and other government leaders are now thinking about.

So I just think this is part of this extraordinary turbulence and the flattening of what were old hierarchies and the crumbling of what were former fences, if you will, between sectors. And I think we don’t know what the proper balance is yet, because it’s being creatively destroyed and resurrected as we speak.

SARAH GREEN: So to sort of go back to the theme of good and then, conversely, not so good, when you’re talking about this convergence of government and business and social and all these things coming together, is that good, or is it scary, or is it just exciting, or do we not know yet?

NANCY KOEHN: I think we don’t know yet. And I think a huge amount depends, as it always does historically, on how individuals, individual leaders, individual communities, individual voters and citizens, acting in what we hope will be the higher interest of the nation and of the economy– those are very, very congruent terms right now– it will be dependent on how individuals acting on the stage right now choose to exercise their agency. So if Howard Schultz is successful, that will make a major difference. If business leaders, who are much more powerful than they know, sit on their hands like they’re sitting on cash right now, then I’m much less optimistic about good and well shaking out together in the market and beyond over the next 10 years.

This is the most critical five-year window in the last 70 years. It’s the most critical for this country. It’s the most critical for the future of business. It’s the most critical for the planet. So every single day that a leader sits on his or her hands and waits is opportunity lost and the future made smaller. There’s never been a call to action like there is right now. And it’s true for households, and it’s true for business. But it’s particularly true for the leaders of organizations and of companies right here, right now.

SARAH GREEN: Well, I think that’s kind of a stirring note to leave it on. Thank you so much, Nancy, for coming in.

NANCY KOEHN: Pleasure.

SARAH GREEN: That was Harvard Business School’s Nancy Koehn. For more, visit hbr.org. And if you like this HBR IdeaCast, we hope you’ll subscribe on iTunes.